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At $148.34, Is It Time To Buy PowerShares QQQ Trust Series 1 (QQQ)?

PowerShares QQQ Trust Series 1 (NASDAQ:QQQ) is trading with a trailing P/E of 8.3x, which is lower than the industry average of 18.8x. While QQQ might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for PowerShares QQQ Trust Series 1

Demystifying the P/E ratio

NasdaqGM:QQQ PE PEG Gauge Oct 17th 17
NasdaqGM:QQQ PE PEG Gauge Oct 17th 17

P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for QQQ

Price-Earnings Ratio = Price per share ÷ Earnings per share

QQQ Price-Earnings Ratio = 148.34 ÷ 17.771 = 8.3x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to QQQ, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since QQQ's P/E of 8.3x is lower than its industry peers (18.8x), it means that investors are paying less than they should for each dollar of QQQ's earnings. Therefore, according to this analysis, QQQ is an under-priced stock.

A few caveats

While our conclusion might prompt you to buy QQQ immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to QQQ. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with QQQ, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing QQQ to are fairly valued by the market. If this does not hold true, QQQ’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

Are you a shareholder? Since you may have already conducted your due diligence on QQQ, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I've outlined above.

Are you a potential investor? If you are considering investing in QQQ, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.

PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on PowerShares QQQ Trust Series 1 for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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